The Fusehttp://energyfuse.org
Understand Energy
Fri, 24 May 2019 19:24:39 +0000 en-US
hourly
1 https://wordpress.org/?v=5.1Petroleum Engineering Enrollment is in Decline: Should Industry Worry?http://energyfuse.org/petroleum-engineering-enrollment-is-in-decline-should-industry-worry/
http://energyfuse.org/petroleum-engineering-enrollment-is-in-decline-should-industry-worry/#respondThu, 23 May 2019 15:00:54 +0000http://energyfuse.org/?p=11708The future appears bright for the nation’s new petroleum engineer graduates—except there are fewer of them entering the workforce than at any time in the last four years

]]>Thousands of students will graduate from American colleges and universities this weekend. Amid the usual pomp and circumstance accompanying the festivities, this year’s graduates have reason to be especially enthusiastic. Earlier this month, the Labor Department’s March jobs report said monthly unemployment was just 3.8 percent of the labor force.

For the nation’s newly minted petroleum engineers, the opportunities seem boundless. Yet, strikingly, there are fewer of them entering the workforce than at any time in the last four years.

According to data provided to SAFE from Texas Tech University, this year the nation’s 22 petroleum engineering programs enrolled nearly 2,000 seniors—roughly 1,800 fewer than in 2016. In total, more than 4,500 U.S. undergraduates were perusing petroleum engineering degrees in 2019, down 60 percent from three years ago.

The decline may seem to be surprising for two reasons. First, the current period of prosperity that has lifted the American economy generally coincides with a tremendous boom in U.S. oil production. Since 2008, the United States added six million barrels of daily crude output, roughly equivalent to the combined present production of Algeria, Angola, Libya, and Nigeria—OPEC’s African oil producers. In addition, more investment is flowing into U.S. shale plays, especially as global oil prices increase above $70 per barrel.

And second, the field of petroleum engineering offers attractive compensation. According to the National Association of Colleges and Employers, petroleum engineers earn starting salaries of approximately $84,000 with standard licensure and a Bachelor of Science degree. This exceeds the second-highest starting salaries of chemical engineers by more than 15 percent. Last year, on average, the Bureau of Labor Statistics (BLS) says petroleum engineers earned $137,000.

Significant oil price declines can make it hard for upstream producers to reliably attract young talent

Despite these draws, enrollment nonetheless fell with oil prices. A sometimes-underreported aspect of oil price volatility, significant oil price declines can make it hard for upstream producers to reliably attract young talent, with approximately a two-year lag in petroleum engineering enrollments (freshmen who start their course of study when prices are high, may not complete it when prices fall). U.S. oil companies are only now feeling the recruiting pinch of OPEC’s price war with American shale producers.

Will this low be any different than the last?

Delayed impact of oil prices on enrollment trends
Petroleum engineering enrollment figures track the volatility of crude oil prices by about two years, the Texas Tech data shows. July 2014 prices peaked at approximately $98 per barrel; one year later, as prices started to decline, nationwide enrollment reached a 12,000-student high and remained at that level through the 2016 academic year. Including the delay, oil prices and enrollment figures track nearly linearly over the past decade, with the number of petroleum engineer majors following closely with changes in prices.

“Students are even more aware of what oil prices are and how they might impact their jobs,” Dr. Lloyd Heinze, a professor of petroleum engineering at Texas Tech University, told The Fuse. “We talk about it with our students when they start their sophomore and junior years. Oil prices have rolled up and down every seven years or so; it’s part of our industry.”

From 2014 to 2016, OPEC and its de facto leader Saudi Arabia refused to cut global production, causing oil prices to crash. More than 238,000 Americans lost their jobs as monthly West Texas Intermediate crude prices fell from $106 per barrel in July 2014, to $30 per barrel 21 months later. Thirty years ago, petroleum engineering enrollment encountered a similarly steep decline when an oil glut caused a rapid price decline.

In the early 2000s, enrollment figures and prices steadily climbed following the U.S. invasion of Iraq and growing Chinese oil demand. Enrollments peaked, and prices collapsed in 2016, sending many graduates into the workforce at an inopportune time. Since then, enrollment figures have declined. The last time there were so few undergraduates pursuing Bachelor of Science degrees in petroleum engineering was 1986 and prices were approximately $31 per barrel ($2015).

“The one thing that’s different about petroleum engineering over other standard engineering programs is that we are dealing with a raw material. Other engineering programs build something from raw materials. The economics of our business is very different,” Dr. Heinze explains. “Any industry that uses raw materials is significantly influenced in price by governments.”

Strictly speaking, oil is no different than other commodities: prices are largely a function of supply and demand. However, unlike other commodities or primary produced products, petroleum is, in fact, very different: it powers more than 40 percent of all energy consumed, and 92 percent of the energy used in transportation. Supply shocks caused by events like civil conflict or natural disasters can create distortions that ripple throughout the economy. And many governments through their state-owned oil companies regulate production to influence prices, keeping oil far from the free-market ideal.

Make oil ‘cool’ again
In the short term, a winnowing pool of graduates could make it tougher for the industry to attract new talent. In total enrollment terms, petroleum engineering is already a small field—so small, in fact, that statistical analyses sometimes lump it in with the broader discipline of mechanical engineering. Still, the medium- and longer-term outlook is positive; BLS notes the total number of petroleum engineering jobs are expected to rise by more than 15 percent nationwide between 2016 and 2026 from approximately 34,000 to 39,000.

Over the past decade, the industry has used petroleum engineering programs for recruiting top-tier, new talent. Prior to the 2015-16 oil price collapse, enrollment in many programs swelled at colleges and universities throughout the shale patch. Today, campuses located in oil-rich states are hotspots for finding the next generation of qualified engineers. At least for now, there are fewer graduates—a trend that, if history is a guide, will reverse itself as higher prices attract more students to the field over the next year.

As petroleum engineers age, the industry will need to replace a retiring cohort of Baby Boomers

As petroleum engineers age, the industry will need to replace a retiring cohort of Baby Boomers. To manage this employment “crew-shift,” oil majors are engaged in a wide-ranging public relations effort to improve the attractiveness of the discipline. Specifically, they want to appeal to Millennials and Generation Z through marketing and advertising that emphasizes environmental stewardship. Major oil companies such as Equinor, Shell, BP, and Chevron are featuring advertisements declaring how their companies reduce carbon emissions through technical expertise and innovation. The central aim of these ads is to recast century-old oil as cool, cutting-edge, and innovative, when in fact there are tech companies that may sometimes seem equally if not more alluring.

Given the competition—why would any matriculating undergraduate choose a career in oil?

The answer is because oil is critically important for the American economy. Accordingly, petroleum engineering knowledge and skills are in high demand and the field pays well. The effectiveness of oil’s marketing and advertising effort is not yet known, but the industry will have a better sense next September when an incoming class of freshmen join Dr. Heinze’s classroom. Whether enrollment figures jump, or decline will signal either an expected uptick in registrations with the oil price recovery, or, potentially, a worrisome shortage of talent.

]]>http://energyfuse.org/petroleum-engineering-enrollment-is-in-decline-should-industry-worry/feed/0When is a steering wheel not just a steering wheel?http://energyfuse.org/when-is-a-steering-wheel-not-just-a-steering-wheel/
http://energyfuse.org/when-is-a-steering-wheel-not-just-a-steering-wheel/#respondWed, 22 May 2019 00:22:47 +0000http://energyfuse.org/?p=11694The exemption process is critical to allow for continued innovation in our transportation system and for continuing the dialogue between industry, government, and external stakeholders.

]]>On Monday, May 20th, SAFE urged the National Highway Traffic Safety Administration (NHTSA) to strongly consider petitions from GM Cruise and Nuro to allow autonomous vehicles (AVs) on the road with “exemptions” from the requirement to include some conventional features such as a steering wheel that are not relevant to fully autonomous vehicles. We have done this because sometimes a steering wheel is not just a steering wheel, but also symbolic of barriers to a more efficient transportation system.

The federal government currently has no specific regulations that require a certain level of performance from AVs. This means that if you buy a vehicle from a dealer and put on equipment to make it autonomous, it is legal in the eyes of the federal government and can be used in commercial service (it’s not totally the Wild West – NHTSA can, and has threatened to, recall AVs that threaten public safety). However, if you take the next logical step and design an AV with no steering wheel or brake pedals, or even without a screen to show the driver the view from the rear-facing camera, you would run afoul of rules, sometimes decades old, that define precisely where steering wheel and brake pedals should be. Companies wishing to design an AV from the ground up without these features – instead of just retrofitting existing car designs – must apply for an exemption from NHTSA.

Why is it important to allow developers the ability to design AVs from the ground up? First, there are real benefits that can be unlocked with custom designs. Take the Nuro R2X (pictured below), which is the subject of one of the petitions. It is not just “driverless”, but “passengerless” as well since it only moves goods around (for delivery), not people. When the average weight of a US car exceeds 4,000 pounds, the R2X weighs under 2,500 pounds. It can do this because there are no airbags, seatbelts, steering wheels, or brake pedals. The EPA has calculated that every 100 pounds taken out of the vehicle improves its fuel economy by 1 percent, so there is potential for very significant fuel savings. Exemptions could also pave the way for more accessible vehicles, improving the usability of our transportation system.

Credit: Nuro

The exemption process is a test of whether the federal government is able to accommodate the latest technological advances from industry.

Additionally, SAFE has long held that public acceptance of AVs requires confidence in the effectiveness and engagement of regulatory authority. The exemption process is a test of whether the federal government is able to accommodate the latest technological advances from industry. The U.S. Department of Transportation is in the midst of a long process to update existing regulations to better accommodate new AV designs and, eventually, to regulate the performance of these self-driving systems. In the interim, NHTSA has a few tools to create a lane for innovation, and exemptions are one of the most important ways to do so.

While NHTSA continues to refine and develop its regulatory philosophy on AVs, it is important that the exemption process continues to be viable–one that developers can productively engage in to allow for new vehicle designs. SAFE has urged the Administration to either approve this petition or clearly outline what would be required for a successful petition. This is the minimum that would be required for exemptions to be an important and helpful regulatory tool for both safety and innovation. This is especially critical as Congress considers a renewed push to pass AV legislation.

The exemption process is critical to allow for continued innovation in our transportation system and for continuing the dialogue between industry, government, and external stakeholders.

Some have argued that exempted vehicles wouldn’t be safe, but this is a misunderstanding of how the law is applied in the FMVSS exemption process. In its filing, SAFE has urged NHTSA to enforce the law on exemptions, arguing that they should be granted if the petitioners demonstrate that their respective requests for an exemption do not pose an unreasonable risk to safety and are also in the public interest. SAFE has urged NHTSA to request sufficient documentation from petitioners to demonstrate that the absence of say, a steering wheel or a screen to display camera views, does not negatively impact the safety of the public. We additionally ask NHTSA to continue to use the legal tools at its disposal to ensure that all AVs on public roads are safe – whether or not they are the recipients of an exemption. Finally, we also urge petitioners, and industry in general, to be as transparent and detailed as possible in the safety case for AVs.

The exemption process is critical to allow for continued innovation in our transportation system and for continuing the dialogue between industry, government, and external stakeholders. We hope that NHTSA will engage with the current petitions and use this valuable tool to improve the safety, energy efficiency, and accessibility of our transportation system.

]]>http://energyfuse.org/when-is-a-steering-wheel-not-just-a-steering-wheel/feed/0Trade War Threatens Oil Marketshttp://energyfuse.org/trade-war-threatens-oil-markets/
http://energyfuse.org/trade-war-threatens-oil-markets/#respondTue, 21 May 2019 21:59:40 +0000http://energyfuse.org/?p=11687Crude oil could be much more expensive if not for the U.S.-China trade war—but the danger is that the trade war tips the global economy into a deeper downturn.

]]>The U.S. recently decided to hike tariffs on $250 billion worth of Chinese imports from 10 to 25 percent. In response, China increased tariffs by the same percentage, although on a smaller volume of imports from the U.S.

Oil prices have been inching up because of major supply outages in Venezuela and Iran, and geopolitical instability threatens an already tight oil market. But crude oil would arguably be much more expensive if not for the U.S.-China trade war. The danger is that the trade war tips the global economy into a deeper downturn.

Higher tariffs directly impact energy flows.

Tariffs a drag on oil and gas
Higher tariffs directly impact energy flows. China refrained from slapping tariffs on U.S. crude, but it did hike tariffs from 10 to 25 percent on U.S. LNG. China is the largest source of LNG demand growth, and by 2025 it will be importing 95 million tonnes per annum (mtpa), up from 53 mtpa in 2018, according to Rystad Energy. That will be enough to make it the largest importer of LNG in the world. As a result, tariffs on U.S. LNG are significant.

To a large degree, the tariffs are manageable for LNG exporters because a significant portion of their shipments are under contract and spot cargoes can be rerouted elsewhere. Nevertheless, the initial 10 percent tariff reduced U.S. LNG exports to China. But the tariffs present a larger danger to proposed LNG export projects that have not yet received final investment decisions. The latest round of tariffs by China should give developers and investors pause. “[T]here will be a reluctance to signing new deals with US projects as long as this trade war persists,” Sindre Knutsson, Senior Analyst at Rystad Energy’s Gas Markets team, said in a statement. “For example, Cheniere and Sinopec agreed late last year on a 20-year deal that would supply 2 million tpa of LNG to China starting in 2023. This deal could have been signed once the trade tensions were resolved, but due to the heightened tensions this has not happened.”

A series of other proposed projects outside the U.S. currently on the drawing board would get a leg up now that U.S. LNG is under Chinese tariffs, especially if the trade war drags on.

Protectionism could cut into oil demand at a time when demand was already showing signs of strain.

More broadly, however, the trade war could act as a drag on global markets more generally. Protectionism could cut into oil demand at a time when demand was already showing signs of strain. In the first quarter of 2019, oil demand grew by 640,000 barrels per day (b/d) compared to the same period a year earlier, according to the International Energy Agency (IEA). Only a month ago, however, the agency expected that figure would end up being 1 million barrels per day (Mb/d). As a result of the downward revision, the IEA said that supply exceeded demand in the first quarter by about 0.7 Mb/d, much higher than initially expected.

However, the IEA expects that dwindling output in Iran and Venezuela could tighten up the market. The 0.7 Mb/d surplus in the first quarter could flip into a deficit of a similar size in the second quarter, the agency said. Also, demand should firm up, the agency believes.

“The general assumption remains that, after a period of weakness at the end of 2018 and in 1Q19, world economic activity is likely to pick up in 2H19 and into 2020. Patient monetary policies and fiscal stimulus should contribute to support growth,” the IEA said. “Rising trade tensions, however, represent the main threat to the currently fragile rebound.”

Trade war adds gloom to darkening outlook
The IEA downgraded its demand estimate for 2019 by 90,000 b/d, but stuck to a rather robust estimate of 1.3 Mb/d. The downward revision was rather minor given the threat that the U.S.-China trade war presents, especially since it shows no signs of abating. Higher tariffs could slow growth at a time when many economies are showing signs of trouble.

A series of emerging markets are reporting weak economic data, including in India, Turkey, Argentina and Brazil. Global auto sales are also cooling, with a significant contraction underway in China, the world’s largest auto market. Car sales in China fell 11.3 percent in the first quarter, year-on-year. Global manufacturing data also appears weak. The U.S. Federal Reserve called off further rate hikes earlier this year in response to the darkening economic outlook.

“Escalating trade conflicts and dangerous financial vulnerabilities threaten a new weakening of activity by undermining investment and confidence worldwide,” the OECD said in its latest Economic Outlook. The OECD sees global GDP expanding by 3.2 percent this year, down from 3.5 percent in 2018. Global trade is expected to expand at its slowest rate in a decade, and the trade war is “hurting manufacturing, disrupting global value chains and generating significant uncertainty,” the report said.

Bank of America noted that crude oil demand growth averaged just 680,000 b/d in the last two quarters, down sharply from the roughly 1.46 Mb/d growth rate over the last five years. “[R]ecent data points to a very meaningful slowdown relative to recent historical trends,” the investment bank said. Worse, the first round of tariffs was mostly “absorbed by a combination of margin compression and foreign exchange rate realignments,” the investment bank said. The latest round of tariffs, now at 25 percent, will increasingly be passed on to consumers. “[G]loomier sentiment has taken hold in some pockets of the global economy,” Bank of America concluded.

A third round of escalating tariffs is possible. The Trump administration has threatened tariffs on another $300 billion of Chinese imports, which would cover nearly all imports from China. If the U.S. follows through on that threat, the world could fall into economic recession, Morgan Stanley said.

As a result, crude oil is trapped between supply outages on the one hand, and economic pitfalls and the trade war on the other. “In our view, the global business cycle is at a key junction. Weakness in manufacturing may drag down services if trade wars eventually hurt consumer sentiment. In a global downturn, Brent could slip to $50/bbl,” Bank of America Merrill Lynch wrote in a note to clients on May 16. “On the other hand, under a US-China deal scenario, business confidence may return with a vengeance, resulting in a weaker USD and stronger global growth. If a cyclical global demand upturn coincides with an IMO2020 boost, Brent crude oil prices could spike to $90/bbl.”

For now, with both U.S. and China digging in, the prospect of the trade war persisting appears more likely than a quick resolution.

]]>http://energyfuse.org/trade-war-threatens-oil-markets/feed/0Market Buoyed by OPEC+ Rhetoric and Falling Venezuelan Productionhttp://energyfuse.org/market-buoyed-by-opec-rhetoric-and-falling-venezuelan-production/
http://energyfuse.org/market-buoyed-by-opec-rhetoric-and-falling-venezuelan-production/#respondSun, 19 May 2019 19:23:42 +0000http://energyfuse.org/?p=11720Any decision to reduce oil inventories OPEC's upcoming meeting will be greatly helped by Venezuela’s declining oil production, which has just fallen to its lowest levels since January 2003.

]]>On May 19, OPEC and its allies held their ministerial monitoring committee (JMMC) in Jeddah, Saudi Arabia. Although the Saudi energy minister told reporters he was recommending “gently” driving down oil inventories, he added the cartel would not rush to any decision ahead of their June meeting in Vienna. However, any decision to reduce oil inventories will be greatly helped by Venezuela’s declining oil production, which has just fallen to its lowest levels since January 2003.

Despite the fact that no clear recommendations were made, the announcement at the JMMC of the cartel’s intention to maintain production cuts had an immediate effect on oil prices. U.S. West Texas Intermediate crude futures rose 34 cents to settle at $63.10 a barrel, after hitting $63.81, the highest price since May 1. Brent crude futures fell 24 cents to settle at $71.97 a barrel, having earlier touched $73.40, its highest price since April 26. The UAE’s energy minister, Suhail al-Mazrouei, earlier told reporters that producers are able to fill any market gap, meaning there was no need to relax the current program of supply cuts.

There remains discord between top producers Russia and Saudi Arabia on extending the production cuts

According to Saudi energy minister Khalid al-Falih, the reason OPEC and its allies, which includes petrostates like Russia, decided not to take any firm decision at the JMMC was because of the fragility of the oil market. Aside from the large number geopolitical conflicts currently unfolding in the Persian Gulf region, from tanker attacks, infrastructure sabotage, and rising US-Iran tensions, including President Trump’s threat to “end” Iran in a recent tweet—there remains discord between top producers Russia and Saudi Arabia on extending the production cuts.

Russian energy minister Alexander Novak told CNBC that while the country is “supportive” of continuing its cooperation with other OPEC+ nations, “this continuation could depend to various extents on how the situation unfolds… and what the forecasts for supply and demand will be on the market.” Signaling a departure from the Saudi plan of maintaining cuts, Novak added, “If it turns out that there will be a shortfall in the market then we will be prepared to examine options linked with a possible increase in production.”

If the decision is taken next month by OPEC to maintain production cuts into the second half of the year, these efforts will be made easier by Venezuela’s continuing production decline. This week, the U.S. Energy Information Administration (EIA) announced that the country’s oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of 2019. The EIA adds that this average “is the lowest level since January 2003,” when production at PDVSA was largely brought to a halt by a nationwide strike and civil unrest.

There is little optimism that Venezuela can reverse its production decline

There is little optimism that Venezuela can reverse its production decline. In fact, the EIA predicts the country’s crude oil production will continue to fall throughout the rest of 2019 “and [these] declines may accelerate as sanctions-related deadlines pass.” The deadlines, the EIA states, included an April 28 deadline provisions that third-party entities stop using the U.S. financial system stop to transactions with PDVSA by April 28, and an upcoming July 27 deadline that that U.S. oil companies, including oil service companies, involved in the oil sector, must cease operations in Venezuela by July 27.

Venezuela’s chronic oil worker shortage and the departure of U.S. oilfield service companies will exacerbate the Venezuelan oil industry’s problems in the second half of 2019. Production operations are being further hampered by power outages, which began on March 7, and they are likely damaging the country’s oil infrastructure. Venezuela’s heavy oil upgraders, which process much of the country’s crude oil for transport, were shut down in March during these outages.

Although no firm decisions have been made on production output goals for the second half of 2019 by OPEC and its OPEC+ allies, there are a number of issues that will remain unaltered regardless of the decision: OPEC output will be dragged down further by falling Venezuelan production, and rising geopolitical tension in the Persian Gulf will push prices higher.

]]>Waymo CTO: 5G will be a self-driving car ‘accelerator and enabler’
Waymo CTO Dmitri Dolgov told reporters last week that fifth generation wireless technology will help the company’s autonomous vehicles with “communication [and with] latency and bandwidth.” 5G has the potential to enable a variety of technologies. With respect to self-driving cars, lower latency could boost real-time decision-making capabilities and bandwidth improvements would help the cars process the massive amounts of data created by sensors. While Waymo’s vehicles currently use dual modems to communicate safety-critical information, Dolgov said that “[5G] will be an accelerator” of the autonomous technology. A recent SAFE issue brief also suggested 5G could help transform mobility, though action is needed to encourage private investment in the technology.

More than half of Chinese consumers are eager for autonomous vehicles, while just over a third of respondents from the United States and the United Kingdom feel similarly.

Chinese More Willing to Embrace Self-Driving Future Than Americans
According to a survey by the Capgemini Research Institute, more than half of Chinese consumers are eager for autonomous vehicles, while just over a third of respondents from the United States and the United Kingdom feel similarly. The survey also indicated that over 50 percent of respondents would prefer to ride in an autonomous vehicle within the next five years and many would be willing to pay up to 20 percent more for such a vehicle. Markus Winkler, global head of automotive at Capgemini, suggested that recent investments and increasing awareness about autonomous vehicles has helped increase overall consumer enthusiasm for the technology. This suggests that increased exposure to autonomous vehicles in the United States may drive higher consumer acceptance levels.

Maserati to Use BMW Self-Driving Technology, Fiat Chairman Says
Fiat Chrysler (FCA) chairman John Elkann announced that Maserati will be FCA’s first brand to use BMW’s self-driving technology. Though a timeline for deployment has yet to be announced, Maserati vehicles will eventually incorporate highway driver-assistance features developed by the German automaker. FCA has been part of BMW’s self-driving consortium since 2017 and has additional partnerships with Waymo and Aptiv. This announcement will ultimately lead to more options for consumers for driver-assist systems, which will help increase exposure to and acceptance of the technology.

GM to Invest $126 Million to Keep 300 Jobs at Canada Plant
General Motors announced last week plans to invest $126 million to continue operation at a facility in Oshawa, Ontario. While the factory’s focus will be stamping and sub-assembly for GM and other companies, part of the facility will be converted to an autonomous vehicle test track. This investment will allow around 10 percent of employees at the facility to keep their jobs. The plan is emblematic of the shifting automotive industry; as automakers prioritize production of electric and autonomous vehicles, factories may be repurposed to accommodate a variety of uses.

]]>http://energyfuse.org/this-week-in-avs-waymo-believes-5g-will-accelerate-av-deployment-chinese-more-comfortable-with-avs-than-americans-and-more/feed/0Infrastructure Week Hearings Point Toward U.S. Solutions for Fallout From Rising Mideast Tensionshttp://energyfuse.org/infrastructure-week-hearings-point-toward-u-s-solutions-for-fallout-from-rising-mideast-tensions/
http://energyfuse.org/infrastructure-week-hearings-point-toward-u-s-solutions-for-fallout-from-rising-mideast-tensions/#respondThu, 16 May 2019 20:38:04 +0000http://energyfuse.org/?p=11669The oil price increase sparked by the recent attacks on Saudi oil tankers is concerning for the United States, because oil is the lifeblood of the American economy.

]]>After a bitter war in Yemen, tougher sanctions on Iran, threats by Tehran to close the Strait of Hormuz and the decision to send an American aircraft carrier to the region, geopolitical turmoil in the Persian Gulf has intensified with attacks on two Saudi oil tankers in Emirati waters. These attacks highlight oil’s importance to the global economy, and the impending arrival in the Gulf of the USS Lincoln demonstrates the volatile commodity’s harmful influence on the United States, the world’s largest oil consumer.

Described as a “sabotage” by Saudi energy minster Khalid al-Falih, the two Saudi tankers were among at least four vessels targeted, including oil-industry ships from the UAE and Norway. One of the Saudi ships involved, a 2.2-million-barrel capacity vessel called the Amjad, was due to pick up oil from the Saudi port of Ras Tanura for export to the United States. The incident drew immediate condemnation from the Gulf Cooperation Council, with council general secretary Abdul Latif bin Rashid al-Zayani calling the incident a “dangerous escalation.” For its part, Iran described the attack as “alarming and regrettable.” The U.S. government, however, has already stated that Iran is likely behind the attacks.

Inevitably, the price of oil jumped in response. Brent crude rose 1.9 percent to trade at $71.75 per barrel, while U.S. crude oil futures gained 1.6 percent to $62.48, as fears continue to grow of an armed conflict erupting in the Strait of Hormuz. This waterway is a critical choke point through which 18.5 million barrels per day passed in 2016, approximately one-third of all the world’s seaborne oil and close to one-fifth of the world’s total oil supply.

This price increase is concerning for the United States, because oil is the lifeblood of the American economy.

This price increase is concerning for the United States, because oil is the lifeblood of the American economy. Aside from being the world’s largest oil consumer, accounting for one-fifth of daily global supply, the U.S. transportation network is 92 percent dependent on oil, with no alternatives available at scale. Even as domestic production reaches new highs, the uniquely global nature of oil prices—in which a supply disruption anywhere affects prices everywhere—means the events unfolding in the Middle East will result in higher pump prices in the U.S., regardless of how much oil the United States produces. As of last week, the EIA calculated that the weekly retail average all grades gasoline price was slightly less than $3.00 per gallon.

This week’s infrastructure hearings offer an initial pathway for U.S. policymakers to reduce the nation’s exposure to volatile oil prices. Today’s Senate Energy and Natural Resources Committee hearing will discuss S. 1317, the American Mineral Security Act,a bipartisan bill that identifies as a national security priority the domestic production and processing of a range of minerals required for the manufacturing of electric vehicle batteries. In response to its announcement, SAFE President and CEO Robbie Diamond said he was pleased to see U.S. minerals production become a congressional priority, adding that the United States is “in a race with China and others to secure minerals and the supply chain as transportation worldwide moves toward an electrified and digitized future.”

Additionally, the Senate Judiciary Committee is holding a hearing on 5G and its impact on national security, competition and innovation. As the next generation of internet delivery, 5G promises speeds far in excess of the current 4G infrastructure, and it offers economic benefits worth trillions of dollars. SAFE’s recent issue brief “The Race to 5G” identifies the significant benefits this technology can bring to roadway safety. This technology also promises a pathway to the infrastructure required for the effective operation of connected, autonomous, shared and electric vehicles.

Both these hearings point the way toward a transportation system not based on oil, but one based domestically produced and more secure domestic alternative fuel sources. Electricity, in particular, is the most viable near-term option, offering a fuel that is not only domestic and diverse in origin, but also low and stable in price: While the price of gasoline has fluctuated from a May 2011 high of $4 per gallon to approximately $2.95 today, electricity has hovered around a price equivalent to $1 per gallon.

Most importantly, however, these hearings point toward a future where oil is not the dominant U.S. transportation fuel. Since the U.S. military spends at least $81 billion every year on securing global oil supplies, this shift away from oil finally would provide the country with a transportation system that truly works in our national interest.

]]>http://energyfuse.org/infrastructure-week-hearings-point-toward-u-s-solutions-for-fallout-from-rising-mideast-tensions/feed/0Geopolitical Risk Rises For Oilhttp://energyfuse.org/geopolitical-risk-rises-for-oil/
http://energyfuse.org/geopolitical-risk-rises-for-oil/#commentsWed, 15 May 2019 16:02:17 +0000http://energyfuse.org/?p=11659A series of apparent attacks on oil infrastructure in the Arabian Peninsula thrusted geopolitical risk to the forefront of market concerns. Against a backdrop of an already tightening supply-demand balance, the possibility of a serious supply outage poses a major risk to market stability.

]]>The oil markets overlooked the major threat to global demand from the U.S.-China trade war this week, instead shifting focus to the Middle East where tensions are rapidly escalating.

A series of apparent attacks on oil infrastructure in the Arabian Peninsula thrusted geopolitical risk to the forefront of market concerns. Against a backdrop of an already tightening supply-demand balance, the possibility of a serious supply outage poses a major risk to market stability.

Attacks on infrastructure
Over the weekend, Saudi Arabia said that two of its oil tankers were hit by explosions off the coast of the UAE, and officials called it an act of sabotage. Two other Norwegian tankers also suffered damage.

There were no reports of a supply outage or an oil spill, but the incidents heightened perceived risk to oil supply in a vital part of the world. More importantly, the incidents fed into a narrative of a cycle of escalating tension between the U.S. and Iran, despite the lack of hard evidence pointing to Iran’s role in the attacks, at least at the time of this writing. An unnamed U.S. official told the Wall Street Journal that the administration doubted Iran was the culprit in the tanker attacks. “It would be very clumsy from the Iranians,” the U.S. official said. Iran, for its part, denied any involvement.

Separate reports suggested that the administration suspected Iran was behind the attacks, but Tehran is accusing Washington of a setup. Iran denounced the tanker attacks and called for an investigation into the incident.

A report from the New York Times said that top national security aides in the Trump administration were briefed on potential war plans against Iran, including one that involved 120,000 troops. The request for the plan came from national security adviser John Bolton, a well-documented hardliner on Iran. President Trump denied the report.

The latest attacks come roughly a week after the Trump administration said that threats from Iran were rising, although they declined to offer evidence. Taken together, however, there is a palpable sense that the two countries are on a collision course as a tit-for-tat cycle of tension becomes increasingly hard to control.

On Tuesday, Saudi Aramco said that two pumping stations were struck by attacks from drones. The pumping stations are connected to a major oil pipeline that runs from Saudi Arabia’s eastern oil fields to the Red Sea. Aramco said that the damage was minor, but it temporarily shut down the line as a precaution. While any involvement of Iran on the tanker attacks is unclear, Houthi rebels claimed responsibility for the drone incident. If the Houthis were behind the attack, Iran was likely involved, some analysts believe.

While details remain murky, the common thread between the string of incidents is that they involve oil transit points that are alternatives to the Strait of Hormuz. The Saudi tankers were destined for the Fujairah oil export terminal on the eastern coast of the UAE, which lies outside the Persian Gulf. The UAE is trying to build up this site, adding storage capacity, in order for oil flowing through the Gulf to have an alternative to the narrow strait. Meanwhile, the drone attacks hit a pipeline that carries oil west from the eastern oil fields in Saudi Arabia to the Red Sea, also bypassing the Persian Gulf.

At just 21 miles in width at its narrowest point, the Strait of Hormuz is often cited as the most critical chokepoint for oil and gas in the world. Roughly 18.5 million barrels per day passed through the Strait in 2016, or about 30 percent of total global seaborne oil and other liquids that year, according to the EIA. About 80 percent of that went to Asia. About 30 percent of the global LNG trade also passes through the narrow waterway.

“Iran has repeatedly threatened to ‘block’ the strait as a ‘weapon’, but due to the importance of the waterway for the global economy and the price of oil, the strait is also protected by the US Navy’s Fifth Fleet and other allies,” Bjørnar Tonhaugen, Head of Oil Market Research at Rystad Energy, said in a statement. “Needless to say, if the strait was to be blocked or disrupted, even only for a short period of time, oil prices would react violently upwards.”

But because the effects would be so catastrophic, “the threats being expressed lately are probably of the rhetorical kind, with less likelihood of the ‘oil weapon’ actually being set in motion,” Bjørnar Tonhaugen added.

Geopolitical risk in a tight market
Still, the oil markets took note, with Brent rising more than 1 percent on Tuesday. The price increase is certainly muted because of the gloom surrounding the escalating U.S.-China trade war. But that makes the jump in prices all the more notable.

Supply disruptions can easily add a few dollars per barrel to the price of oil. But even perceived risk can push prices higher. Historically, major price movements tend to occur when markets are tight, while the risk premium becomes much smaller if there is plenty of oil sloshing around. In the years following the oil market collapse in 2014, geopolitical unrest melted away as a major driver in price swings.

However, the OPEC+ production cuts have tightened up the market. Meanwhile, production is rapidly declining in Venezuela and Iran, and another significant outage is possible in Libya. Russian oil contamination has interrupted oil flows to Europe. Any further supply risk could spook the market and send prices much higher. And because oil is a fungible commodity, and the market is truly global, even a small outages in far-flung places can lead to painful price spikes everywhere.

]]>Electric vehicles (EVs) have long been viewed as an enduring demand-side solution to U.S. oil dependence. Yet for this enhanced energy security to be realized, the United State must ensure it does not cede control of the vital EV battery supply chain, and the strategic minerals that feed it. The race to secure this supply chain, as transportation worldwide moves toward an electrified and digitized future, has taken on a greater urgency as China has raced ahead in this area.

The outcome of this competition has profound consequences for U.S. economic and national security. As the world’s largest oil consumer, accounting for one-fifth of daily global supply, American oil dependence exposes consumers and businesses to oil price volatility, engineered—either wholly or in part—by the OPEC cartel. Despite U.S. production reaching new highs, OPEC still holds 83 percent of the world’s oil reserves; this figure rises to 90 percent when OPEC+ petrostate allies like Russia are factored in. If China controlled the battery supply chain too, then the United States risks merely swapping one dependence for another.

Warnings about the United States’ faltering progress on this front are beginning to reach Washington. In testimony to the U.S. Senate in February, Simon Moores, the managing director of Benchmark Mineral Intelligence, said, “We are in the midst of a global battery arms race, in which so far the U.S. is a bystander.” This warning was repeated at an event held by Benchmark last week, which outlined the scale of the problem: China produces nearly two-thirds of the world’s lithium-ion batteries, whereas the United States produces just 5 percent.

Speaking at the event, SAFE President and CEO Robbie Diamond told the audience the United States “should not go from dependence on oil from the Middle East for transportation, to dependence on China for electric vehicles and batteries.” In a separate statement, he added, “If we are to maintain pace with China and not cede the commanding heights of the global economy, we must develop our domestic mineral resource base to the highest standards and other components of the battery supply chain all the way to the consumer.”

The issue is gathering Congressional attention. At last week’s Benchmark conference, Senator Lisa Murkowski announced her plans to introduce the American Mineral Security Act. If enacted, the bill would update the list of critical minerals every three years, prioritize workforce development, and provide greater predictability for the permitting process with the aim of developing U.S. minerals resources. “Our challenge is still a failure to understand the vulnerability we are in as a nation when it comes to reliance on others for our minerals,” Murkowski said. The bill is being cosponsored by, among others, Sen. Joe Manchin.

While both China and the United States have invested in lithium mining projects in Chile, Argentina and Australia, China has increased domestic production—producing almost eight times more lithium domestically than the United States, which produces just 1.2 percent of the world’s supply. “You can’t build half a million electric vehicle battery packs without a secure supply of several critical raw materials,” Chris Berry, a battery-metals analyst at House Mountain Partners, told Bloomberg. “If the U.S. lags in the build out of lithium or cathode capacity, its supply chain dynamism and competitiveness around the new energy theme is put at risk.”

If EVs are to provide the United States with optimal economic and national security, American efforts to capture a greater share of the battery supply chain must be increased. From developing the U.S. mineral resource base to gaining a greater share of battery production, the United States cannot afford to be a bystander in the global battery arms race.

]]>http://energyfuse.org/race-to-secure-strategic-minerals-gaining-national-urgency/feed/0Oil Majors Post Poor First Quarterhttp://energyfuse.org/oil-majors-post-poor-first-quarter/
http://energyfuse.org/oil-majors-post-poor-first-quarter/#respondThu, 09 May 2019 14:37:29 +0000http://energyfuse.org/?p=11646The poor performance in the first three months of the year has not put a dent in confidence among top oil executives who see stronger profits later this year and next, although plenty of uncertainty remains.

]]>The first quarter was not a great one for the oil majors, as low oil prices and narrow refining margins ate into profits. It marked a setback for the industry, which emerged last year largely repaired from 2014-2016 downturn.

The poor performance in the first three months of the year has not put a dent in confidence among top oil executives who see stronger profits later this year and next, although plenty of uncertainty remains.

Down first quarter
The largest integrated oil companies largely posted disappointing results for the first quarter. Here is a quick rundown:

ExxonMobil: $2.4 billion in profits, down 49 percent from $4.6 billion from the first quarter of 2018.

Chevron: $2.6 billion in profits, down 28 percent from $3.6 billion a year earlier.

Total SA: $2.8 billion in profits, down only 4 percent from the $2.9 billion in earnings last year.

Royal Dutch Shell: $5.3 billion on current cost of supply (similar to adjusted net income), down 7 percent from the $5.9 billion a year earlier.

The common thread in all of the reports is lower oil prices compared to a year earlier, sharply lower LNG price, and smaller margins for refining. Despite the recent rally in prices, oil was still recovering from the fourth quarter downturn at the start of this year. An onslaught of new LNG projects coming online in 2019 has led to a situation of oversupply, pushing prices below $5/MMBtu, down by more than three-quarters from the peak reached a few years ago, although it’s important to note that much of the LNG trade occurs under contractual prices.

“Solid operating performance in the first quarter helped mitigate the impact of challenging Downstream and Chemical margin environments. In addition, we continued to benefit from our integrated business model,” Exxon CEO Darren W. Woods said in a press release. Woods pointed to Canada where mandatory production cuts helped recover heavily discounted Western Canada Select (WCS) prices, but also further eroded refining margins. “The change in Canadian crude differentials, as well as heavy scheduled maintenance, similar to the fourth quarter of 2018, affected our quarterly results,” Woods said.

Notably, Exxon lost $256 million on its refining unit, after earning $940 million a year earlier. As the Wall Street Journal noted, refining accounted for about a third of the profits for Chevron and Exxon over the last five years, but was a major source of weakness in the first quarter of this year.

The European oil majors fared better. Total’s earnings were down only slightly, which the company used as evidence of a strong performance. The French oil giant saw production jump by 9 percent year-on-year, due to the startup of a handful of projects in Nigeria, Australia and Angola. Shell and BP also weathered market volatility, holding up better than their American peers.

Shell pointed to its heavy investment in natural gas as a source of strength. The Anglo-Dutch company took in $2.57 billion from its Integrated Gas unit, surpassing analyst estimates by 24 percent. Shell controls about 25 percent of total global LNG exports, and despite the crash in LNG prices, Shell did well because much of its shipments are under contract with Brent-linked prices.

Oil executives from the top integrated companies all offered similar assurances to investors and analysts on their earnings calls, blaming temporary market conditions for their poor performances. They expressed confidence that the setback was a one-off, and that larger profits would return as soon as the second quarter.

Temporary setback?
Oil executives from the top integrated companies all offered similar assurances to investors and analysts on their earnings calls, blaming temporary market conditions for their poor performances. They expressed confidence that the setback was a one-off, and that larger profits would return as soon as the second quarter.

Supporting that view is the fact that refining margins have rebounded strongly as of late. High processing rates at the end of 2018 led to a glut of gasoline. In November 2018, margins on gasoline actually fell into negative territory, according to the EIA, after averaging 26 cents per gallon in the first half of the year. Diesel margins were much higher, but because gasoline is produced in conjunction with diesel, as refiners chased diesel sales by processing at elevated levels, they exacerbated the gasoline glut.

According to BP, the global average refining margin fell from $14.7 per barrel in the third quarter of 2018 to $10.2 per barrel in the first quarter of 2019. The good news for the oil majors is that refining margins have been on the upswing in the last few months, and are up to $16.7 per barrel so far in the second quarter, according to BP. While some seasonal factors come into play, the prevailing second-quarter margin is also up from the $14.9 per barrel margin in the second quarter of last year.

However, while downstream units have proven to be more reliable in recent years, refining also makes up a smaller slice of earnings compared to upstream production. For instance, even when looking at 1Q2018, a better period for refining, ExxonMobil earned $940 million from its downstream operations, but it took in $3.5 billion from its upstream unit.

The crash in refining margins meant that its downstream unit lost $256 million in the first quarter of 2019. That is a significant year-on-year decline to be sure, but Exxon’s upstream earnings fell by over $600 million as well, despite Brent oil prices only trading an average of $3-per-barrel lower between the two periods. In other words, even small changes in crude oil prices have an outsize impact on overall earnings. The oil majors, despite plans to diversify, still live and die by the price of oil.

As a result, there is no guarantee that the poor performance in the first quarter was an aberration.

As a result, there is no guarantee that the poor performance in the first quarter was an aberration. While top executives appear confident going forward, they are still at the mercy of the whims of the market.

]]>International visitors to the Chinese Ministry of Industry and Information Technology’s website (MIIT) were in for a surprise over the past few weeks when, after typing in the URL (www.miit.gov.cn), they found that the site would not load. Those visitors who are perhaps used to adapting to the hurdles of conducting research from within China may have tried to turn on their Virtual Private Networks (VPN) and, after manually setting their IP address to appear in China, were rewarded with the discovery that China’s key industry and tech ministry’s website is not down, but instead blocked to the outside world.

Although blocking foreign access to a ministry website may not seem like a large issue, it encapsulates the high-stakes nature of tech competition between China and the United States, particularly in the areas of manufacturing and technology.

Researchers use the MIIT website to obtain official statistics on manufacturing as well as for important regulatory information and discussion of industrial policy. The ministry has become increasingly important for international researchers as Sino-U.S. trade tensions for various reasons—not least because the MIIT is charged with implementing the “Made in China 2025” policy. The Mercator Institute for China Studies (MERICS) describes “Made in China 2025” as an “ambitious plan…to turn the country into a ‘manufacturing superpower’ over the coming decade.” The industrial policy roadmap identifies strategic products and industries that will enable China to dominate both domestic and foreign markets for the coming wave of Industry 4.0.

The plan has drawn a congressional response from Sen. Marco Rubio, whose subsequent report, “Made in China 2025 and the Future of American Industry,” states that Chinese plans to become the global leader in innovation and manufacturing “would be an unacceptable outcome for American workers.” In a separate statement, Rubio highlights “the challenges posed by China’s blatant industrial espionage and coercion.”

Falling just short of establishing local content requirements in order to avoid WTO obligations, the semi-official targets of “Made in China 2025” suggest that the government intends for Chinese companies to dominate the domestic market in areas like new energy vehicles (a category that includes electric and hydrogen fuel cell vehicles), high-tech shipping components, new and renewable energy equipment, industrial robots, mobile phone chips, and other areas at the forefront of high-tech manufacturing. Industries identified in the grand industrial plan can expect to receive government support through local subsidies, low-interest lending, and other undisclosed forms of state support.

One of these unofficial targets is for Chinese manufacturers to supply 80 percent of new energy vehicles sold in the domestic market by 2025. Such an unofficial target represents a significant threat to international automakers in the Chinese market in the short term and in the global market in the longer term. A recent press release from the People’s Daily, the mouthpiece of the Chinese Communist Party, lauds the domestic supply chain advances in vehicle manufacturing alongside official statistical release from MIIT stating that China sold 1.3 million new energy vehicles in 2018. The reporter writes: “At the Close of the Shanghai International Auto Show and the Chengdu International New Energy Auto Show, this reporter saw how the application of advanced technologies such as 5G and Internet of Things (IOT) mobile technologies not only help the “smartification” of the whole vehicle, but also how the new energy vehicle supply chain aids in the development of these new technologies.”

In its original Chinese, the article strongly infers that these supply chain developments are part of the nation’s plans and efforts under Made in China 2025—a point that is belied in the title of the article: “My Country Will Manufacture More Than 1.5 million New Energy Vehicles in 2019”. Given the tone of the article It certainly doesn’t seem that it is an accident that one of the two articles linked in recommended reading section below is titled: “MIIT: at least one Chinese automaker brand will rank in the top ten for global sales by 2025.”

It is unclear exactly why the MIIT website is blocked when the trade war is slated to come to an end in the coming weeks—barring another breakdown in relations between the two countries. Perhaps the eventual cessation of the trade war between the U.S. and China will lead to a more level playing field, however, the blocking of a key ministry website to those outside of China does not signal that the future of tech and industrial competition will be any less contentious.